It may come as a shock to some of my fellow baby boomers that when House Republican legislators recently unveiled their 2016 CARE Act — that’s Caring for the Aging, Retiring and Elderly — its centerpiece was aimed squarely at us.
I refer to the proposal already approved last session by the GOP-controlled House to phase in over five years an exemption of all Social Security benefits from state income taxation, regardless of a filer’s other income. (The Social Security benefits of low-income seniors are already exempt.)
We boomers may not be ready to believe it. But the bulk of our generational cohort will be Social Security-eligible by the time the GOP-proffered tax-free benefits would be fully phased in. That would be in 2020 — about the same time in which the number of senior citizens in Minnesota is expected to overtake the number of children in K-12 schools for the first time in state history.
Evidently, that impending demographic tilt is already producing political consequences. Younger Minnesotans should be on alert. As long as we boomers are breathing and voting in our accustomed big numbers, the political temptation to pander to us at the expense of future generations will be strong.
What expense? The House proposal would cut state revenue by $1 billion per biennium within six years, and more thereafter as boomer retirements keep on coming. Though a majority of us boomers are now in our 60s, the last of our cohort won’t turn 65 until 2029.
Take a bite that big out of state coffers, and somebody will either pay more or receive less in state services. And that somebody likely won’t be elderly — not when half of the state budget goes to education and many elder-care services are mandated and matched by the federal government.
Political pressure to favor the gray-haired set is likely to be especially keen in Greater Minnesota, where median ages have already climbed past 40 in most counties and past 50 in a few, compared with median ages in the 30s in the metro area.
Thus, it stands to reason that House Republicans are promoting tax-free Social Security benefits. They owe their majority to Greater Minnesota’s preference for the GOP in 2014, and appear to be aiming to keep it in 2016 with the same geographic appeal.
“It’s time for Minnesota to join the more than 40 other states who exempt Social Security from state income taxes,” said Rep. Tama Theis, R-St. Cloud, at the CARE Act’s Dec. 21 unveiling. “These proposals allow seniors to keep more of their hard-earned dollars and will help more seniors afford to stay in their homes and close to their families.”
Those words conjure a sympathetic image. But before legislators rush to the aid of huddled, impoverished Social Security recipients, they should know these facts:
• Minnesota seniors with incomes under $34,000 a year ($44,000 for married filing jointly) already pay little or no state income tax on Social Security benefits.
• No more than 85 percent of Social Security benefits are subject to state taxation, regardless of a recipient’s total income. That’s in keeping with federal law and acknowledges that a portion of a beneficiary’s Social Security check derives from FICA taxes paid during a worker’s lifetime — though employer contributions, interest earned by the Social Security Trust Fund and FICA taxes paid by today’s workers provide a larger share.
• Forty percent of the tax break the House proposal offers would go to seniors with six-figure incomes. Those with incomes under $50,000 a year would receive only 12 percent of the total cut.
• Minnesota seniors’ incomes relative to those of the working-age population have grown substantially in recent years. In 1990, the median income of tax filers past age 65 in Minnesota was 58 percent of the median of those of working age. In 2013, it was 86 percent, according to economist Karen Smith Conway of the University of New Hampshire, a national expert on state taxation of Social Security benefits.
• Income inequality has widened for all in the last two decades, but it’s much smaller for Minnesota seniors than for the rest of the state’s population, Conway’s research found.
• Eliminating state taxation of Social Security has not made other states a magnet for seniors, Conway said in an interview last week. “The idea that retirees shop around for a place to live where taxes are lowest is a myth,” she said. Her analysis in 2012 found that “fewer than 1 percent of senior citizens in this country move across state lines in any one year, and only a small fraction of them are affected by taxes.”
Conway said she and her research partners Ben Brewer of the University of New Hampshire and Jonathon Rork of Reed College “keep trying to find a decent policy explanation for these cuts” in state taxation of Social Security. “We can’t find it.”
What she is seeing is that some of the 29 states that don’t tax Social Security benefits “are beginning to tap on the brakes” as they see what the baby boomer retirement bulge really means for state revenue. Minnesota is the only state in the country considering a larger exemption this year, she said.
Minnesota is confronting a worsening shortage of skilled workers. Its college students graduate with some of the heaviest debt loads in the country, and its child-care costs are third-highest in the nation. Those are problems that legislators could try to ease this year with smart state tax policy. Or they could give this state’s elders a sweet tax cut — and risk making those other problems worse as more boomers reach their Social Security years.
Lori Sturdevant, an editorial writer and columnist, is at firstname.lastname@example.org.